The $8 Billion OPEB Liability is Not Due Today

How many people understand this point? My guess, not many. An article in the Charleston Gazette this morning may help:

“The unfunded liabilities would be a problem if all state and local retirees went into retirement at once, but they won’t. Nor will state governments go out of business and hand underfunded pension plans over to a federal regulator, as happens in the private sector. State and local governments are ongoing enterprises.”

The same could be said of West Virginia’s OPEB liability, which may be addressed this week. The $8 billion OPEB liability reflects the total projected cost of retiree health care benefits over the next 30 years. It is important to recognize that the growth of retiree health care costs is not happening in a vacuum; state and local budget will also grow over the next 30 years.

For example, the total shortfall in funding is $7.6 billion in FY 2011. In 2009, West Virginia’s GDP was $63.3 billion. Using a growth rate of 2.6% per year (which is modest given our 12-year annual state average of 4.3% from 1997-2009) and a 3.0% discount rate, our total output over the next 30 years would be about $1.8 trillion. Of this amount, the OPEB liability represents about 0.42% of future income. This implies that increased revenue equal to 42 cents of every $100 of future output would be enough to eliminate the shortfall. As I noted here, this does not imply that we should do nothing to control costs or that we should not find additional revenue.

Another clarifying point made in the above article is the crucial difference between state governments and the private sector. Since private sector employers cannot raise new revenue easily, it makes sense to worry if pensions and OPEBs are not fully prefunded. A state, on the other hand, does not “go out of business” and they can always raise revenue through taxation (although this can be difficult).

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